That's good news for the recovery, as economists look to increased consumer spending to help drive job growth in 2011.

"On the consumer end, we ended off the year on a pretty decent note" said Jennifer Lee, senior economist with BMO Capital Markets.

Meanwhile, Americans saved $614.1 billion in December, compared with $634.4 billion the prior month. And personal savings as a percentage of disposable income nudged down to 5.3% from 5.5% in November.

Economists expect disposable income to increase further in January, boosted by the 2% payroll tax cut that started at the beginning of the year.

Inflation at record low

The core Personal Consumption Expenditures price index, an inflation gauge that strips out volatile food and energy prices and is closely watched by the Federal Reserve, fell to 0.7% -- the lowest level on record since the Commerce Department started tracking the data in 1959.

It falls far below the 1.6% to 2% inflation range the Fed is looking for. The central bank has said that low inflation levels are a key reason behind its controversial policy of pumping $600 billion into the economy.

Prior to this year, the other record low for PCE inflation was last reached in November 1961, when it fell to 1.1% year-over-year, a Commerce Department spokesman said.